Question

The 1973 recession was caused by higher oil prices that shifted ______________ and caused inflation to ___________ and unemployment to __________.
1. SRAS up/left, increase, increase
2. SRAS down/right, increase, increase
3. SRAS up/left, decrease, decrease
4. AD left, increase, decrease

Answer 1

Answer:

The correct answer is 2. The 1973 recession was caused by higher oil prices that shifted short run aggregate supply down and caused inflation to increase and unemployment to increase.

Explanation:

The 1973 recession was caused by the 1973 oil crisis, that broke out as a result of the Yom Kippur War.

During and after the Yom Kippur War, the Arab members of OPEC, plus Egypt and Syria, tried to force the United States and its allies to stop supporting Israel, which had fought against Arab nations in several wars. To end the oil crisis, the United States threatened the Arab countries and the Soviet Union, which often assisted them, with stopping grain supplies. At about the same time, OPEC decided on drastic oil price increases.

The oil crisis slowed down economic growth, accelerated inflation, triggered the economic downturn, and caused recession in some countries including America. The United States responded to the lessons of the energy crisis by issuing permits for the construction of nuclear power plants and today, as a result, almost 80% of electricity is generated by nuclear power.